Scientific research is expensive. But the Income Tax Department in India offers a thoughtful way to ease this burden for businesses & institutions that invest in R&D. Enter Section 35 of the Income Tax Act, which allows weighted deductions for eligible expenditures on scientific research. In simpler words, it rewards innovation with tax savings.
Whether you're a pharma company, a startup working on clean energy, or a trust funding research in biotechnology, this section can be a goldmine if understood & applied correctly.
What is Section 35 of the Income Tax Act?
Section 35 provides for tax deductions on revenue & capital expenditure incurred for scientific research related to the taxpayer’s business. You can claim 100%, 150%, or even 200% deduction depending on the nature of the research & the institution or in-house facility involved.
There are primarily three routes through which a taxpayer can avail benefits under Section 35:
- In-house Research: Expenditure directly incurred by the company on its research.
- Approved Institutions: Contributions to approved scientific research institutions, colleges, or universities.
- National Laboratory / IIT / Specified Authority: Donations or contributions to these are also eligible for weighted deductions.
So, it’s not just about lab coats and beakers—if you're spending on R&D, even indirectly, you could save a significant chunk on taxes.
Breakdown of Deduction Types
Let’s look at how deductions under Section 35 are categorised:
- Section 35(1)(i): Revenue expenditure on scientific research related to the business.
- Section 35(1)(ii): Contributions to approved scientific research institutions (150% deduction previously, now 100%).
- Section 35(1)(iii): Contributions to research related to social sciences or statistics (now at 100%).
- Section 35(2AA): Payments to national laboratories, IITs, or approved bodies for scientific research (125% deduction post-revision).
- Section 35(2AB): Expenditure on in-house R&D by companies in specified industries (e.g., biotech, pharma)—eligible for weighted deduction of 150% earlier, now reduced to 100%.
Earlier, many of these allowed weighted deductions of up to 200%, but the Finance Act 2020 rationalised these benefits, capping most at 100%. Still, that’s a direct tax saving!"
Why It Matters for Businesses
Scientific research isn’t just about discovery; it's about long-term value creation. Section 35 is one of the few provisions that directly incentivise this effort. It allows you to:
- Lower your tax liability.
- Increase your profit margins.
- Justify R&D investments.
- Fuel innovation in sectors like AI, energy, pharma, agriculture, etc.
If your business involves innovation or product development, you should explore this route, especially if you're dealing with high initial costs.
Link with Charitable Trusts and Specified Persons
It may come as a surprise, but transactions by charitable trusts with specified persons under Section 13(3) are also relevant when dealing with Section 35. Here’s how:
If a charitable trust contributes funds to a research institution, & that institution is run by a specified person (as defined in Section 13(3)), then the donation may lose its tax-exempt status. That’s why understanding who qualifies as a specified person is crucial when charitable entities are involved in research-based funding.
This prevents misuse of trust funds while ensuring transparency & fair taxation. "
Practical Example
Let’s say your company spends ₹20 lakh on setting up an in-house R&D lab. This amount can be fully deducted under Section 35(2AB). Imagine reducing your taxable income by ₹20 lakh without even going through complex deduction games.
And if you contribute ₹10 lakh to a national lab approved under Section 35(2AA), you could earlier claim ₹15 lakh (150%) as a deduction. Now, the deduction is at 100%—still, you reduce ₹10 lakh straight from your taxable profits.
Final Thoughts
Section 35 of the Income Tax Act isn’t just for labs or academic geeks—it’s a real opportunity for smart businesses & institutions to innovate and save at the same time. If you're spending on science, tech, or development, why not let the taxman reward you for it?
But hey, like every tax provision, it comes with conditions, clauses, & cross-references. Whether you're a company, a trust, or a professional firm, knowing how Section 35 fits into your tax strategy can unlock major benefits.
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